Buying and selling a business is a multifaceted process and entails more than exchanging a check for the keys to a storefront. In our new blog series, we will be discussing the intricacies of a business sale process, so you can be prepared for all steps you may encounter.
Whether you’re the buyer or seller in a business sale, preparing well for the transaction is crucial as it lays the groundwork for a smooth and successful process. Even for small and closely held businesses, the transaction will (or at least should) involve more than naming a price and signing a check. This article discusses the roles of professional advisors, key documents, specific steps for both buyers and sellers, and the legal and regulatory considerations that the parties should consider at the outset of the transaction.
The Importance of Professional Advisors
One of the first and most important steps in preparing for a business transaction is assembling a team of professional advisors. These experts bring specialized knowledge and experience that can help you avoid common pitfalls and ensure that your interests are protected throughout the process. The main experts you will want to consult are your lawyer, your CPA or financial advisor, and a business broker. It’s important to get these parties involved early in the transaction, as their experience and knowledge can help structure the deal in a manner that heads of problems before they come.
Lawyer. A business transaction lawyer is essential for navigating the legal complexities of buying or selling your business. They will draft and review contracts, ensure compliance with applicable laws, and, in some cases, negotiate terms to protect your interests. Your lawyer will also be instrumental in drafting the Letter of Intent (LOI) and Non-Disclosure Agreement (NDA), both of which are critical documents in the early stages of the transaction.
CPA & Financial Advisor. A Certified Public Accountant (CPA) provides invaluable financial expertise. They will help you understand the financial health of the business, whether you’re buying or selling, and can offer advice on tax implications and structuring the deal to your advantage. For sellers, a CPA can assist in preparing the business’s financial statements for scrutiny by potential buyers.
For buyers, a financial advisor can help you explore and secure financing options. They can provide advice on structuring your purchase in a way that aligns with your financial goals and risk tolerance.
Business Broker or M&A Advisor. A business broker or M&A (Mergers & Acquisitions) advisor can facilitate the transaction by using their vast networks to connect buyers and sellers, valuing the business, and negotiating terms. They play a crucial role in marketing the business for sale and ensuring that it reaches the right potential buyers.
These professionals work together to ensure that the transaction is conducted smoothly, legally, and with a clear understanding of the financial implications.
Key Early Documents: Letter of Intent and Non-Disclosure Agreement
Two key documents play a pivotal role in the early stages of a business transaction: the Letter of Intent (LOI) and the Non-Disclosure Agreement (NDA).
Letter of Intent (LOI). The LOI is a non-binding document that outlines the preliminary terms of the transaction. It includes key details such as the purchase price, payment terms, and any contingencies that must be met before the deal can be finalized. Furthermore, it often sets a timeline to keep the finalization of the transaction on track. While the LOI is not legally binding, it is a crucial step in establishing a mutual understanding between the buyer and seller and setting the framework for the final agreement.
Non-Disclosure Agreement (NDA). The NDA is a legally binding document that ensures confidentiality during the transaction process from early discussion through the execution of the final agreement. It protects sensitive information that will be shared between the buyer and seller, such as financial records, customer lists, and proprietary business processes. The NDA is essential in allowing the open and honest disclosures and discourse necessary to negotiate and complete a transaction while preventing the misuse of confidential information.
These documents are critical in establishing trust and clarity between the parties and laying the groundwork for a successful transaction.
Buyer and Seller Important First Steps and Considerations
The buyer and sellers to a transaction have many aligning interests—for example, seeing the transaction through to completion—however, they also bare different risks and should attend to different details to protect their unique interest.
Buyer. When you are the buyer, you should take care to attend to the following key steps in the outset of acquiring a business:
- Conduct Due Diligence: Due diligence is the process of thoroughly investigating the business you intend to purchase. This involves a detailed review of the company’s state and federal registration documents, tax and financial statements, contracts, employee agreements, intellectual property, and any potential legal liabilities. The goal is to identify any risks or issues that could affect the value of the business, the feasibility of the transaction, and your future operation of the business.
- Form a Purchasing Entity: Before proceeding with the purchase, you will typically want to form a legal entity through which the acquisition will be made. This could be a new corporation, LLC, or other business structure. The choice of entity will depend on various factors, including tax implications and your future goals. It is important to purchase the new business through an entity as it will protect both you and the entity from each other’s liabilities.
- Secure Financing: Unless you are purchasing the business with cash, securing financing is also a critical step in any transaction. Financing options may include traditional bank loans, SBA loans, or private equity. It is important to explore all available options and secure the necessary funds before finalizing the transaction. It is also important to acknowledge how your financing may impact how you structure other elements of the transaction.
- Have a Business Plan: Before purchasing another business, you should have an idea of how you want to run the business. For example, will you need employees? Do you intend to keep the business’s current employees or hire a new group? Do you hope to expand the business or renovate the premises? Will you need investors? You will want to consider these questions (and other business-specific questions) before you get too deep into any transaction.
These preparatory steps are crucial for buyers to ensure that they are fully informed and financially prepared to make a successful acquisition.
Seller. If you are the seller in a transaction, your important preliminary steps include:
- Getting the House in Order. Before putting your business on the market, it’s crucial to clean up any potential red flags that could deter buyers or negatively impact your business’s valuation. While ongoing operations mean some accounts payable and day-to-day liabilities are normal, resolving major liabilities—such as large debts, legal disputes, or overdue taxes—can significantly increase the appeal of your business. It is also essential to ensure that your business is compliant with all regulatory requirements, including state registration, licensing, permits, and filings. As noted above, buyers will seek evidence of these matters as they conduct due diligence. Ensuring that compliance and financial records are up-to-date and that the business is in decent financial health will reassure potential buyers that the business is well-managed and prepared to be purchased.
- Obtaining Internal Resolutions and Approvals: IIf your business is owned by multiple parties (even as few as two people), it is important to secure internal resolutions and approvals before proceeding with the sale. This is especially the case if your businesses governing documents (for example, its Bylaws or Operating Agreement) set forth specific procedural requirements regarding consent in significant transactions. This may involve getting consent from shareholders, partners, or board members, depending on your business structure. Proper documentation of these approvals is essential to ensure a legally compliant transaction and also to prove that the transaction was authorized if it is ever challenged in the future.
- Obtaining a Valuation: Accurately valuing your business is crucial to attracting serious buyers and achieving a fair sale price. A professional valuation will consider various factors, including financial performance, market conditions, and the potential for future growth. A business broker or CPA can assist with this process to ensure that you set a realistic and competitive asking price.
- Notifying Employees: Deciding when and how to notify your employees about the sale is a delicate matter. Premature disclosure can cause uncertainty and disrupt operations, while delaying the announcement for too long can lead to rumors and loss of trust. However you decide to address this, notifying your employees, especially if the sale will result in a change of management, is an important step.
These steps are crucial for sellers to ensure that their business is in the best possible position for a successful sale.
Legal and Regulatory Considerations. Both buyers and sellers must navigate a complex landscape of legal and regulatory requirements during a business transaction. Failure to comply with these requirements can result in delays, financial penalties to either or both parties, or even the collapse of the deal. These legal and regulatory concerns include:
- Complying with Local, State, and Federal Laws: It is essential to ensure that the transaction complies with all relevant laws, including zoning regulations, employment laws, and environmental regulations. Your legal advisor will be instrumental in conducting a legal audit to identify any potential issues and ensure that all necessary permits and licenses are transferred or obtained.
- Tax Considerations: The tax implications of buying or selling a business can be significant. For sellers, the structure of the sale (for example, an asset sale versus an equity sale) will affect how the proceeds are taxed. Buyers must also consider the tax implications of acquiring a business, including potential liabilities for unpaid taxes. A CPA can provide valuable guidance on how to structure the transaction to minimize tax liability.
- Contractual Obligations: Existing contracts with customers, suppliers, and employees must be carefully reviewed to determine how they will be affected by the transaction. In some cases, contracts may need to be assigned or renegotiated. This is particularly important in industries with long-term contracts or where relationships with key suppliers or customers are critical to the business’s success.
Navigating these legal and regulatory considerations is essential to avoiding unexpected obstacles and ensuring a smooth transaction.
Conclusion
Preparing for the sale or purchase of a closely held business is a complex process that requires careful planning and professional guidance. By assembling the right team of advisors, drafting key documents, and taking the necessary steps as a buyer or seller, you can set the stage for a successful transaction. Contact Skufca Law at (704) 376-3030 to gain insight from an experienced attorney on how to prepare for a smooth business purchase or sale.
In the next part of our series, we’ll delve into the crucial topics of valuation and due diligence. We’ll explore how to accurately determine the value of a business and the importance of conducting a thorough investigation before proceeding with a purchase.